NFTs as Proof-of-Investment

Raze uses NFTs as a proof of investment in addition to a duly signed and executed investment agreement. When an investor makes an investment through Raze, they receive an NFT as a record of their investment. This NFT serves as a digital representation of the investment and can be stored in a digital wallet. The NFT also has metadata within it referencing the signed investment agreement. The following benefits are just some of the areas NFTs can impact and benefit fundraising:

Flexibility

NFTs can be programmed with specific metadata and contract terms per NFT that can offer additional utility beyond a fungible token. Since security tokens should be able to represent a wide variety of real assets that already exist in the physical world, they by their very nature have infinite possibilities of terms and conditions under an investment contract.

For example, how does a company offer benefits, terms, conditions, contract expirations, distributions of benefits payments using fungible tokens? These conditions need to be hard coded into the token.

Using a non-fungible also enables the tracking and administration of unique instruments such as revenue share tokens with a smart contract and blockchain to fully automate record keeping and distributions in a fully integrated financial blockchain verified environment.

Non-fungible tokens can handle any investment vehicle already developed and any in the future. The investment contract terms, the return on investment for the investor, the identity of the investor, the privacy of the investor, and the ongoing governance of the securities can all be managed by non-fungible tokens because of the flexible nature of the vehicle and protocol.

Proof of Ownership, KYC/AML, and Privacy

The old days of issuing stock certificates were replaced by digital securities years ago. However, investors need and desire to still have an easy, secure, safe, and private way to hold and manage their investment contracts, shares in a company, fractional interest in a property they own, and other complex ownership vehicles that represent investments or securities. Non fungible tokens can serve as a superior “container” that can easily hold, connect, and reference any complex or simple investment contract along with connecting the owner while maintaining privacy since they serve as a far better way to store data vs. just represent value. Fungible tokens present a problem. Since all of them are the same and do not care who owns them, they create issues with future verification of investors, transfer of those tokens to any other wallet, and trading of those tokens to anyone in the world.

The conflicting goals of ensuring both the privacy of the holder of the security token and the identity of the holder is unique. Companies must know who their investors are, must maintain records of every transaction, must ensure restricted securities are not prematurely sold or transferred to other parties, and file with all regulatory authorities in their jurisdictions. Conversely, they should offer the ability for investors to maintain privacy on the blockchain and ensure their security tokens can be held and maintained in a decentralized manner via a wallet.

Companies can also issue NFTs to represent their investors since each investor should be a unique person or company. Once the mint has occurred, the security can then be stored safely and privately in the investors decentralized wallet. No names or identities are revealed in a public nature on the blockchain but only wallet addresses. However, the company issuing the security token has all the investors information and can use it for verification in the future when issuing returns and distributions. In order to claim future distributions or any promised return from the issuing party, the smart contracts can be programmed and automated to each holder of the non-fungible token with key metadata tied to it for verification.

Compliance and Governance

The automated compliance of security token issuance has not achieved commercial acceptance or scalable adoption yet and is years away. Therefore, companies wanting to issue their own security offering have to go through two parallel compliance processes for regulatory and compliance approval. This process can be just as expensive and challenging as going through a traditional IPO process. However, non-fungible tokens can represent a traditional security offering process because the security NFT itself is not the tradable security that will be listed on an exchange or DEX for immediate issuance and trading.

The NFT, in the use case of a security, actually is a representation of a traditional security offering including, but not limited to any Regulation D private placement (including exemptions), traditional LLC membership agreement, revenue share agreements, SAFE and SAFT instruments, debt financing vehicles, and more. In principle, NFTs may also be used for crowdfunding and Reg A+ offerings in the future too. The reason this is possible is that the company goes through their standard regulatory steps with legal representation and simply uses non fungible tokens to offer the traditional investment offering, receive the preferred currency for payment (including accepting crypto), execute and bind a contract, verify investor identities, and issue proof of this entire transaction process recorded on the blockchain with permanent history all while maintain privacy for the investor. 

Furthermore, each contract term can either be unique to each investor or the same for a group of investors which is impossible using a fungible token.

Compliance is critical in this process to ensure the issuer is protecting the rights of the investor vs. just its own interest. Traditional investment contracts handle this already so there is no reason to re-create or change that process just because you are trying to use blockchain to improve or leverage other benefits. Some of the benefits of using a non-fungible in relation to compliance and regulation include:

• Control the issuance and transfer of restricted private placement offerings
• All activity is tracked on the blockchain allowing for more transparency
• Potential to eliminate traditional intermediary roles and reduce cost of management and compliance of private placement offerings while imposing necessary and critical restrictions for compliance
• Potential to develop a positive model to work with regulators to meet regulatory goals of transparency and disclosures to investors by developing real time verified financial and material information. Company information may be verified via decentralized disinterested trust-less blockchains and such verified records may be integrated with dynamic smart contract NFT’s to automate revenue sharing and dividend payments and disclose material information to investors
  
  The rights of the investor are at the foundation of why regulatory bodies exist. Companies must continue to go to great lengths to protect their investor communities, especially in less regulated markets like the private placement world. Non-fungible tokens can provide companies the ability to offer their investors and shareholders voting rights, legal assurances, clarity on claims for dividends or revenue shares, and proper corporate governance including managing the cap table.

Fragmentation of Protocols

Theoretically, any company can quickly create a fungible security token (assuming they go through the proper regulation channels) and issue it to private investors. However, the explosion of tens of thousands of “alt coins” or coin offerings has created fragmentation that makes it nearly impossible for a private company wanting to raise capital to consider issuing a security offering to their private investors. They may have to begin competing with every fungible token issued since investors have a vast array of options to consider when investing in fungible tokens. Even though the security token offering may be private in nature and have limited supply, it’s still on the blockchain and the tokenomics and future value may be compared to every other token issued to the public markets.

Documents and Contracts

NFTs are linked to signed investor agreements that in their nature are unique for every investor. How does a company issue investor agreements tied to securities that are executed by unique people and then tied to their security tokens? Non-fungible tokens make this process far simpler by incorporating the investment contract execution process inside the minting of the non-fungible token. In addition, each investment contract can be tied or stored in the metadata of the non-fungible token and kept as a history for the company. Since non fungible tokens are unique in nature, they are perfect for companies to enter into contacts with investors promising a future return for their investment. The minted token by the investor technically represents a unique investor, signing a unique contract, with a company. The company may issue one or more of the same contracts and return terms to investors but that investor signing the contract and investing represents a unique agreement between the investor and issuer. The minting of a non-fungible token can now handle the contract execution process, the history of that unique contract signed, and the future enforceability of the contract terms.

Fractionalization

Using fungible tokens assumes the ownership interest of that assets have simple and consistent terms of ownership for each entity involved in the transaction. Using a fungible token assumes Owner A of the asset has the same rights, agreements, amount of ownership, and contract terms as Owner B. The amount of fractional equity or shares that represent ownership of that physical asset is one consideration but the unique terms in the ownership contract is another.

For example, let’s say an owner of a real estate property wants to fractionally sell part or all of his property but he wants to offer unique instruments, rights, and contract terms to sell that property. How does the property owner do this with a simple fungible security token? The equity ownership rights could be sold using a fungible token which makes it easy to issue shares of that property. How are the unique contracts handled with each owner?

What if investor A wants to own 30% of the property with the ability to also make a percentage of the rental income generated on the property? A standard LLC agreement with addendums would easily handle that but there would be no way to tokenize or represent that on the blockchain in its entirety – until the non-fungible token.

Now the owner can leverage a non-fungible token model and issue one or more NFTs. The owner can easily handle everything related to the transaction including the unique contract terms with that one investor, any ownership amount, proof of ownership on the blockchain, handling of acceptance of the preferred currency paid by the investor (including the history of this transaction since it’s on chain) and allows for future distributions owed to the investor since they will have their NFT inside their private, decentralized wallet.

Platforms and “The Middle Man”

The current state of security tokens for private placement offerings has created a vastly different marketplace for investors than the public exchanges to trade crypto currencies that may be treated as securities or commodities. Today, a handful of security token platforms exist that allow companies to to issue fungible security tokens, but they are all acting in silos and are not working on a common standard. If companies begin using non fungible tokens to represent their investment contracts (which are securities), they depend less on these platforms and can simply continue to offer investors private opportunities, in a compliant way, to raise capital.

Additionally, using non fungible tokens has the opportunity to replace or eliminate the need in some cases for certain entities that were created out of past regulatory developments. The need for their duties does not change but certain aspects such as intermediaries or custodians of digital securities no longer become as important since each investor should be holding their digital security in their decentralized wallet which is all tracked on the blockchain